The high-end art world has long been inaccessible to the masses. Famous paintings and artwork at Sotheby’s and Christie’s sell at auctions for millions of dollars. The combination of high demand from ultra-wealthy investors and a global supply scarcity of famous art pieces drives the art market toward steady price appreciation. Enter Masterworks.
Investing in art has become increasingly popular in recent years, as more investors look for alternative asset classes. One platform that has gained attention in the art investment world is Masterworks. However, with any investment opportunity, there are always concerns about legitimacy and transparency.
What is Masterworks?
Masterworks is an online platform that offers investors the opportunity to invest in high-end artworks. The platform acquires artworks from galleries and auction houses and divides them into shares that investors can buy. Investors can purchase a percentage of the artwork, which represents a fraction of the overall value of the artwork. Masterworks charges an annual fee of 1.5% of the artwork’s value and a 20% commission fee on any profits made when the artwork is sold.
Masterworks, a startup that sells fractional ownership in famous artwork, aims to democratize the blue-chip art market. The startup attained unicorn status, or a valuation of over $1 billion, following a $110 million Series A financing round. Participation in the financing round came from investors including Left Lane Capital, Galaxy Interactive, and Tru Arrow Partners.
Art as an Asset Class
As an asset class, art has generated extremely strong and consistent returns over the years. Art consistently has outperformed asset classes including U.S. equities, global equities, and gold. Over the past 25 years, contemporary art has outperformed the S&P 500 index nearly three-fold.
“We really believe that the only investable segment of the art market are paintings worth a million dollars or more, generally speaking, and when I say investable, I mean something that produces predictable returns,” states Masterworks CEO Scott Lynn.
In contrast with Non-Fungible Tokens (NFTs) or meme stocks, blue-chip art generates consistent and profitable returns. “Art as an asset class is not a GameStop or an NFT, at the end of the day the returns are fairly predictable,” says Lynn. “Investing in one of these paintings, you’re never going to earn 10 times your money, but you’re also probably never going to lose 90% of your money.”
Benefits of Investing in Art through Masterworks
Art investments and other real assets also offer a good hedge against inflation. Contemporary art performs especially well when interest rates are low. It has performed better than other asset classes that tend to perform well in low interest rate environments, like gold and real estate.
According to a report from Citibank, the art market remains relatively resilient during economic downturns and world events. In 2020, during the COVID-19 pandemic, the art market outperformed 10 major asset classes and the contemporary art market generated the strongest returns.
Investing in art through Masterworks offers several benefits, including:
Access to High-End Artworks: Masterworks provides access to blue-chip artworks that are usually out of reach for the average investor. Fractional ownership allows investors to participate in high-value art investments, which can appreciate significantly over time
Portfolio Diversification: Investing in art can be an excellent way to diversify an investment portfolio. Art often has a low correlation with traditional asset classes such as stocks and bonds, which can help to reduce portfolio volatility and improve risk-adjusted returns.
Potential for Significant Returns: Art investments have the potential to generate significant returns, particularly for blue-chip artworks. Masterworks’ focus on high-end art ensures that investors have exposure to artworks that have a track record of appreciation.
Liquidity: Investing in art can be an illiquid investment, but Masterworks offers liquidity to investors through its secondary market. Investors can sell their shares in an artwork on the platform’s secondary market, providing a way to liquidate their investment.
Real-World Example of Masterworks Investment:
One example of a successful investment through Masterworks is the sale of “Femme au béret et à la robe quadrillée” by Pablo Picasso. The artwork was purchased by Masterworks in 2018 for $6.4 million and was later sold for $9.9 million, generating a profit of $3.5 million. Investors who held shares in the artwork realized a return of approximately 32% on their investment.
Masterworks offers investors a unique opportunity to invest in high-end artworks that would otherwise be out of reach. The platform’s approach of fractional ownership of artworks has democratized the art investment market. However, as with any investment opportunity, there are always risks, and investors should conduct their due diligence before investing in Masterworks. While there are concerns about the platform’s transparency, there are examples of successful investments made through Masterworks. Overall, investing in art through Masterworks can be a viable investment option for investors looking for portfolio diversification and the potential for significant returns.
Masterworks Facilitates Participation in Art Investment
Alternative asset classes are increasingly appealing to investors. Young people under the age of 40 have shown a significant and increasing interest in high-end art investing. The leading auction houses, art fairs, and galleries have also increasingly embraced digitalization and virtual events.
One barrier to participation in the art investment world is a lack of knowledge about how to discern which art pieces will produce strong investment returns. This is especially true when it comes to the elusive contemporary art market. This is where Masterworks can help investors.
As an asset class, art has generated extremely strong and consistent returns over the years. Art consistently has outperformed asset classes including U.S. equities, global equities, and gold. Over the past 25 years, contemporary art has outperformed the S&P 500 index nearly three-fold.
A Team of Experts
Masterworks has an in-house research team devoted to assessing art market performance. Of the over 6,000 artworks the research team has analyzed, fewer than 2.2% have passed their diligence process. Since the company’s inception in September 2019, Masterworks has had over 80 total offerings that have produced an average return of 15%.
The company’s leadership team is composed of seasoned art experts. Masterworks CEO Scott Lynn is an internationally recognized art collector as well as a technology entrepreneur. Nigel Glenday, the Chief Financial Officer at Masterworks, spent over 15 years in investment banking with a specialization in art finance. Masha Golovina, the director of art purchasing, has over 10 years of work experience in art economics and research. Finally, Josh Goldstein, general counsel at Masterworks, was previously a corporate lawyer at the international law firm Skadden Arps.
How It Works
Masterworks buys and stores a number of famous paintings. Through qualified public offerings registered with the SEC, Masterworks sells shares that represent fractional ownership stakes in each piece. Investors are allowed to trade those shares on its secondary market once an offering closes. When Masterworks eventually sells a painting, usually 3-5 years later, it pays shareholders in proportion to their ownership stake.
The startup offers a self-directed investment platform through www.masterworks.io. The investor community currently includes over 95,000 members. Masterworks makes money by charging a 1.5% annual management fee on each painting. They also take 20% of the profit from each painting sale.
A curated selection of famous artwork is available for investment on the Masterworks online platform. Past Masterworks auctions have included paintings by artists from many centuries ago, such as Pablo Picasso and Claude Monet. In addition, several contemporary pieces (produced between 1995 and 2020) have been made accessible to Masterwork investors. The selection includes pieces by artists such as Andy Warhol, Jean-Michel Basquiat, Yayoi Kusama, and Keith Haring.